Legislature(2003 - 2004)

03/01/2004 01:10 PM House JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 468 - APPEAL BONDS: TOBACCO SETTLEMENT PARTIES                                                                             
Number 1524                                                                                                                     
CHAIR McGUIRE announced that the  next order of business would be                                                               
HOUSE BILL  NO. 468, "An Act  relating to the amount  of the bond                                                               
required  to stay  execution of  a judgment  in civil  litigation                                                               
involving  a  signatory,  a  successor  of  a  signatory,  or  an                                                               
affiliate  of   a  signatory  to   the  tobacco   product  Master                                                               
Settlement  Agreement during  an appeal;  amending Rules  204 and                                                               
205, Alaska  Rules of Appellate  Procedure; and providing  for an                                                               
effective date."                                                                                                                
Number 1528                                                                                                                     
REPRESENTATIVE  ANDERSON, speaking  as chair  of the  House Labor                                                               
and Commerce  Standing Committee,  sponsor of  HB 468,  said that                                                               
the  tobacco  Master  Settlement  Agreement  ("MSA")  is  vitally                                                               
important to  Alaska and to the  other 45 states who  are parties                                                               
to that settlement.  It  delivers millions of dollars in revenues                                                               
to  Alaska annually,  and will  continue to  do so  for years  to                                                               
come.    However,  the  continued   receipt  of  these  funds  is                                                               
threatened  by  the  huge judgments  being  awarded  against  the                                                               
tobacco  companies funding  the  settlement.   Defendants  facing                                                               
such judgments almost  always have a right to appeal  and, in may                                                               
cases,  their  appeals  are successful  in  obtaining  a  reduced                                                               
judgment or in  overturning the judgment entirely.   But in order                                                               
to stay the execution of a  money judgment on appeal, a defendant                                                               
must  post a  supersedeas -  or "appeal"  - bond,  which, in  the                                                               
diminishing number of  states not having limits  on appeal bonds,                                                               
usually equals the  amount of the judgment.  In  Alaska, the bond                                                               
required  is  ordinarily the  amount  of  the judgment  remaining                                                               
unsatisfied, plus appeal  costs and interest.   But Alaska courts                                                               
are permitted  to set  the bond  in a  different amount  for good                                                               
cause  shown,  meaning judges  may  set  the  bond at  an  amount                                                               
exceeding the total judgment.                                                                                                   
REPRESENTATIVE ANDERSON went  on to say that if  a company cannot                                                               
afford to  post a bond  in the amount set  by the court,  the end                                                               
result is that  the company may be forced to  file for bankruptcy                                                               
-  which  carries with  it  an  automatic  stay of  the  debtor's                                                               
obligation to pay its creditors -  in order to stop the plaintiff                                                               
from taking  its assets  during the  appeal.   Such a  stay could                                                               
disrupt  payments by  the company,  including payments  to Alaska                                                               
and the other  states under the MSA.  This  problem has been most                                                               
vividly  demonstrated  by the  ongoing  [Engle  v. R.J.  Reynolds                                                             
Tobacco Company]  case in  Florida, in which  a class  of smokers                                                             
was  awarded $145  billion in  punitive damages.   Had  there not                                                               
been  an appeal-bond  cap in  place at  that time,  the defendant                                                               
tobacco companies would clearly  have gone bankrupt, resulting in                                                               
the termination  of all MSA  settlement payments  nationwide, and                                                               
precluding  the ability  to  pursue a  fair  and orderly  appeal.                                                               
However,   because  Florida   had  previously   enacted  bond-cap                                                               
legislation,  the   settlement  payments  continued   during  the                                                               
appeal, and the appellate court  ultimately rejected and reversed                                                               
the verdict in its entirety.                                                                                                    
Number 1669                                                                                                                     
REPRESENTATIVE  ANDERSON remarked  that to  date, 26  states have                                                               
recognized  the  possibility  of enormous  appeal  bonds  causing                                                               
signatory companies  to be  unable to  meet their  obligations to                                                               
the  states  under   the  MSA,  and  these   states  have  passed                                                               
legislation  or amended  court rules  to  limit the  size of  the                                                               
required bond in  cases involving large judgments.   In addition,                                                               
5 other states do  not require a defendant to post  a bond at all                                                               
during an appeal.   Some states have  passed legislation applying                                                               
broadly to  all litigants,  while other  states have  passed more                                                               
limited   legislation   applying   only   to   MSA   signatories,                                                               
successors,  and  affiliates.   The  bond  limits range  from  $1                                                               
million to  $150 million.  Nearly  all of the statutes  include a                                                               
provision  allowing for  a higher  bond  amount, up  to the  full                                                               
value  of  the  judgment,  if   the  court  determines  that  the                                                               
appellant is dissipating assets to avoid paying a judgment.                                                                     
REPRESENTATIVE ANDERSON said  that HB 468 imposes a  limit of $25                                                               
million   on  the   supersedeas   bond   that  MSA   signatories,                                                               
successors, and affiliates  must post to stay the  execution of a                                                               
judgment in Alaska.   This bond limit would not  change any other                                                               
aspect of the law - for example,  the rules by which the trial is                                                               
conducted,  or who  ultimately wins  or  loses the  lawsuit -  or                                                               
affect the rights  of the plaintiffs to recover  the full damages                                                               
to which they  are entitled if the judgment is  upheld on appeal.                                                               
Plaintiffs are  also protected by  the provision in  the proposed                                                               
legislation that allows the court to  require a bond amount up to                                                               
the value  of the  judgment if the  appellant is  dissipating its                                                               
assets to  avoid paying a  judgment.   House Bill 468  would not,                                                               
therefore, injure  plaintiffs in  any way,  and it  would protect                                                               
the  state  by ensuring  it  will  continue  to receive  its  MSA                                                               
payments  while the  tobacco companies  fully appeal  any adverse                                                               
judgment.   In  conclusion, he  noted that  the Senate  Judiciary                                                               
Standing  Committee  has  reported  the  companion  bill  out  of                                                               
REPRESENTATIVE GRUENBERG noted the presence  of a typo on page 1,                                                               
line 7;  it currently refers  to AS  43.53 but it  should instead                                                               
refer to  AS 45.53.  He  suggested that the drafter  correct that                                                               
CHAIR  McGUIRE   indicated  that  there  would   be  a  technical                                                               
amendment to fix that error.                                                                                                    
Number 1801                                                                                                                     
KEITH A.  TEEL, Attorney,  Co-Chair, Legislative  Practice Group,                                                               
and  Chair, Tobacco  Practice Group,  Covington &  Burling, noted                                                               
that he  has been  involved "in this  effort around  the country"                                                               
for the last three or four years.  He said:                                                                                     
     I represent  the four  original tobacco  companies that                                                                    
     signed the Master Settlement  Agreement with Alaska and                                                                    
     the  other  states.   And  those  companies are  Philip                                                                    
     Morris   [Incorporated];  Lorillard   Tobacco  Company;                                                                    
     Brown  &  Williamson   Tobacco  Corporation;  and  R.J.                                                                    
     Reynolds Tobacco  Company.   Those companies  are quite                                                                    
     interested  in  trying  to ensure  that  the  MSA,  the                                                                    
     Master Settlement Agreement, continues  in force - that                                                                    
     nothing happens to  mess it up, frankly.   And that may                                                                    
     sound a little strange because  they were sued by a lot                                                                    
     of  states  and,  ...  under  this  agreement,  they're                                                                    
     required to  pay a lot  of money.  But  frankly, having                                                                    
     lived  through  the  experience, the  companies  really                                                                    
     believe ...  it's a better  world, with  these payments                                                                    
     being  made and  the  obligations they  made under  the                                                                    
     [MSA] being honored, than a  situation where the states                                                                    
     are all suing the industry.                                                                                                
     And so ...  my clients would very much like  to live up                                                                    
     to their obligations under the  [MSA]. ... For us, this                                                                    
     is about  the catastrophic  situation where a  piece of                                                                    
     litigation  just gets  so ...  out of  control that  it                                                                    
     produces a verdict that is  impossible or at least next                                                                    
     to impossible  to bond,  to post an  appeal bond.   And                                                                    
     while  that  sounds  a  little  farfetched,  it  indeed                                                                    
     (indisc. -  coughing) in  the last  four years  of this                                                                    
     industry.   Once was  in a case  called Engle,  down in                                                                  
     Florida, in  2000, that resulted  in a verdict  of $145                                                                    
     billion, and  under the  then-existing law  in Florida,                                                                    
     the  companies  would have  been  required  to post  an                                                                    
     appeal  bond  of  $181 billion,  which  is  simply  not                                                                    
     possible; there  is not a  commercial market  more than                                                                    
     about  $10  billion in  the  world,  total, for  appeal                                                                    
     bonds, and  the most any  one company could get  in the                                                                    
     way of a commercial appeal bond is perhaps $2 billion.                                                                     
Number 1925                                                                                                                     
MR. TEEL continued:                                                                                                             
     So  there's simply  not a  market for  appeal bonds  of                                                                    
     [this] size.   (Indisc.)  that judgment, as  was noted,                                                                    
     was  completely reversed  last May  and went  away, but                                                                    
     had the companies been required  to post an appeal bond                                                                    
     under the  previously existing Florida law,  they would                                                                    
     have  been forced  to seek  a stay  through some  other                                                                    
     means than posting  a bond.  And the only  other way we                                                                    
     know of is to declare  bankruptcy, and the problem with                                                                    
     a  bankruptcy  filing  is  that   it  does  produce  an                                                                    
     automatic  stay of  all  payment  obligations but  it's                                                                    
     indiscriminate;  it  wouldn't   just  prevent  us  from                                                                    
     having  to pay  a judgment  while we  appeal, it  would                                                                    
     prevent us from  being able to make  payments under the                                                                    
     [MSA].   And that would  ... present a  serious problem                                                                    
     for all  the states  in this country  that rely,  for a                                                                    
     lot of different budgetary reasons, on these funds.                                                                        
     As a  result of  that concern, the  Florida legislature                                                                    
     chose to  (indisc. -  paper rustling)  limit of  a $100                                                                    
     million, and that allowed the  companies to post a bond                                                                    
     and to go ahead and appeal.   Last year, the other case                                                                    
     arose, which  was in Illinois,  and that  case resulted                                                                    
     in  a judgment  of $10.1  billion.   It was  a consumer                                                                    
     fraud case;  there was all  sorts of evidence  that was                                                                    
     put  into the  case that  suggested that  the companies                                                                    
     had  mislead the  public in  saying that  ... so-called                                                                    
     "light" cigarettes - low tar  and nicotine cigarettes -                                                                    
     are  safe, and  the  contention of  the plaintiffs  was                                                                    
     that  they were  not,  or not  any  safer than  regular                                                                    
     And in that case, which was  tried not to a jury but to                                                                    
     a  judge,  the judge  ordered  $10.1  billion and  then                                                                    
     ordered  that  a  $12 billion  bond  be  posted,  under                                                                    
     Illinois law,  in order to prevent  the plaintiffs from                                                                    
     executing  while the  defendants sought  to appeal  the                                                                    
     judgment.   What  happened next  was a  lengthy dispute                                                                    
     that at  one point  involved 37 attorneys  general from                                                                    
     other states, including Alaska,  filing a petition with                                                                    
     the courts  in Illinois  saying, "Please allow  a lower                                                                    
     bond."   And  it ultimately  got to  the state  supreme                                                                    
     court  before  the  supreme court  allowed  (indisc.  -                                                                    
     coughing)  $6.8 billion.   Still  a mammoth  amount and                                                                    
     something that  could not be  repeated.  So  that's the                                                                    
     history here.   There are  two cases, that but  for, in                                                                    
     the  one, the  legislature reducing  the bond,  and, in                                                                    
     the other,  the company  somehow scraping  together the                                                                    
     ability to post  a $6.8 billion bond,  there would have                                                                    
     been a bankruptcy situation.                                                                                               
Number 2021                                                                                                                     
MR. TEEL went on to say:                                                                                                        
       And that  bankruptcy would  have stopped  payments in                                                                    
     those states under  the [MSA] and in  every other state                                                                    
     under   the  [MSA].      The  stay,   as   I  say,   is                                                                    
     indiscriminate.   This  background ...  probably should                                                                    
     be augmented  by just talking  for a minute  about what                                                                    
     appeal  bonds  are for  anyway.    Appeal bonds  are  a                                                                    
     creature  of,  really, a  long  history  in the  United                                                                    
     States; they've been around, in  some states, since the                                                                    
     early 1800s.   And ... frankly, when I  think of appeal                                                                    
     bonds,  I think  of  a time  when  Abraham Lincoln  was                                                                    
     practicing law  and a defendant could  literally hop on                                                                    
     his horse  and ride  out of town  without ...  paying a                                                                    
     judgment. ...  Class actions  did not  exist in  a time                                                                    
     when  appeal bonds  (indisc. -  paper rustling);  these                                                                    
     massive punitive  damage judgments  didn't exist.   And                                                                    
     the result  was that  nobody contemplated the  kinds of                                                                    
     massive judgments that you now  see, that the two cases                                                                    
     I've  just  described  are,  ...  when  thinking  about                                                                    
     appeal bonds.                                                                                                              
     We  now  have that  situation,  and  we also  have  the                                                                    
     rather odd situation, the only  one I'm aware of, where                                                                    
     states  around  the  country  are  dependant  on  [MSA]                                                                    
     revenues.   For that reason,  ... 26 states  have acted                                                                    
     to limit the appeal bond.   In addition, 5 other states                                                                    
     don't require a  bond at all, just  the (indisc.) stays                                                                    
     of a judgment while it's on  appeal.  So you've now got                                                                    
     31 states  in this country  that do not  require appeal                                                                    
     bonds; that covers  about 70 to 75 percent  of the U.S.                                                                    
     population.  Frankly,  our desire, our goal,  is to try                                                                    
     to  pass this  everywhere because,  as these  two cases                                                                    
     I've described  have shown,  one bad  judgment anywhere                                                                    
     can  prevent the  companies from  being  able to  honor                                                                    
     their obligations under the [MSA],  and we would rather                                                                    
     not see that happen.                                                                                                       
Number 2111                                                                                                                     
MR. TEEL concluded:                                                                                                             
     Just  a couple  of  final points.    First, there's  no                                                                    
     change in  this bill in  the substantive law.  ... What                                                                    
     this bill basically does is  allow the companies to get                                                                    
     through the appeal process  without having their assets                                                                    
     taken or  being forced  [into a]  bankruptcy situation.                                                                    
     ...  If  under the  law  they  should lose  the  trial,                                                                    
     presumably that  verdict will  be sustained  on appeal,                                                                    
     but at least it will  let them get through the [appeal]                                                                    
     process.   Second,  this is  not  a fix  for some  case                                                                    
     that's hanging  out there right  now; we are  not aware                                                                    
     of a  case in Alaska  ... that currently  presents this                                                                    
     kind of risk.  This is not  an effort to try to mess up                                                                    
     an ongoing  piece of litigation for  somebody else, but                                                                    
     we  feel that  we have  to do  this in  every state  in                                                                    
     order to protect the MSA.                                                                                                  
     Third,  the dissipation-of-assets  provision ...  is in                                                                    
     this bill as it has been in  most of the bills.  One of                                                                    
     the comments  I've occasionally  heard made  about this                                                                    
     is,  "How does  anybody know  whether that's  going on,                                                                    
     whether assets  are being dissipated," and  I think the                                                                    
     answer to that is [that]  in some industries maybe that                                                                    
     would be  hard to  see, [but]  there's probably  not an                                                                    
     industry  in the  United States  that  is more  closely                                                                    
     watched by all  sorts of people -  including 50 state's                                                                    
     attorneys  general  -  right   now,  than  the  tobacco                                                                    
     industry:  the  four companies I represent.   There's a                                                                    
     ton of  public information available, there's  a ton of                                                                    
     analysts out  there who follow  this, and I  (indisc. -                                                                    
     coughing) pretty easy to  see whether a dissipation-of-                                                                    
     assets situation was occurring.                                                                                            
     Finally,  a comment  was made  in previous  hearings on                                                                    
     the Senate bill  ... [regarding] what happens  if ... a                                                                    
     truck driven by  a Philip Morris employee  plows into a                                                                    
     school bus  in Alaska.  There  may be a lot  of answers                                                                    
     one could  give to that  ..., but the basic  answer is:                                                                    
     Philip  Morris doesn't  have any  employees in  Alaska;                                                                    
     its  parent company,  Altria  [Group,  Inc.], does  not                                                                    
     have  any  employees  in Alaska;  its  sister  company,                                                                    
     Kraft [Foods],  does not have any  employees in Alaska.                                                                    
     That's not how the chain  of distribution works, and so                                                                    
     while it's  an interesting hypothetical, it's  just not                                                                    
     something  that's likely  to happen  in  Alaska.   With                                                                    
     that, I will stop, and I'd  ... be very happy to answer                                                                    
     any questions.                                                                                                             
Number 2203                                                                                                                     
REPRESENTATIVE  GRUENBERG turned  attention  to page  2, line  5,                                                               
which read in  part, "is dissipating assets  outside the ordinary                                                               
course of  business to avoid  payment", and said he  is concerned                                                               
about  a possible  loophole.    He remarked,  "I  don't want  the                                                               
defendant to  be able to  say, 'Well,  we're trying to  avoid the                                                               
payment  of the  judgment, but  it's  in the  ordinary course  of                                                               
business';  so I'd  like to  eliminate the  phrase, 'outside  the                                                               
ordinary  course of  business".   Representative Gruenberg  asked                                                               
Mr. Teel if he would be opposed to eliminating that phrase.                                                                     
MR. TEEL replied:                                                                                                               
     That  language  is  in virtually  every  one  of  these                                                                    
     dissipation-of-assets  sections, and  the reason  it is                                                                    
     there  is  to  try  to  recognize  that  the  companies                                                                    
     involved  here  are  pretty  huge  companies  that  are                                                                    
     constantly  moving  money  around   for  all  sorts  of                                                                    
     purposes.  What we were  trying to get at was something                                                                    
     where   a   pattern   emerges  of   something   unusual                                                                    
     happening, like ... moving the  company out of New York                                                                    
     City and into  Mexico or something.  So  we were trying                                                                    
     to set up the comparison  between what's the normal ...                                                                    
     pattern  of behavior  for these  specific companies  in                                                                    
     their  ordinary  course.   It  was  not an  attempt  to                                                                    
     create some  sort of loophole;  it was just  an attempt                                                                    
     to recognize  that there's  got to  be some  ability to                                                                    
     move money.  If the  committee really wants to do that,                                                                    
     I recognize that is not  the most important language in                                                                    
     the  bill, but  it is  language that's  in every  other                                                                    
     state's dissipation section.                                                                                               
REPRESENTATIVE GRUENBERG  remarked that he  did not want  to wind                                                               
up going  before the  supreme court on  the construction  of that                                                               
particular phrase.                                                                                                              
MR. TEEL  said that although he  would prefer that the  phrase be                                                               
retained, he understands if the  committee would prefer to remove                                                               
Number 2297                                                                                                                     
REPRESENTATIVE  GRUENBERG asked  whether anyone  else has  raised                                                               
this issue.                                                                                                                     
MR. TEEL  replied that from  time to  time, during the  course of                                                               
similar discussion in  other states, it has been  raised, but the                                                               
end result  for the most part  has been to retain  that language.                                                               
He  noted, however,  that  there  are two  or  three states  that                                                               
decided  not to  include  "this  provision."   In  response to  a                                                               
question,  he   said  that  although   there  have   been  slight                                                               
variations of  the provision,  it has pretty  much said  the same                                                               
thing and included the "outside  the ordinary course of business"                                                               
REPRESENTATIVE  GARA  asked  Mr.  Teel if  he  helped  draft  the                                                               
language in HB 468.                                                                                                             
MR. TEEL said yes.                                                                                                              
REPRESENTATIVE GARA  asked what  the phrase,  "an affiliate  of a                                                               
signatory" means.                                                                                                               
MR. TEEL  said that  typically, the way  affiliate is  defined in                                                               
the law, it includes parent corporations and sibling companies.                                                                 
TAPE 04-30, SIDE B                                                                                                            
Number 2393                                                                                                                     
MR.  TEEL went  on  to say  that  what he  and  his clients  were                                                               
concerned  about  were  situations  in which  somebody  throws  a                                                               
parent company into litigation against  the party that signed the                                                               
MSA.   In such a situation,  a judgment against a  parent company                                                               
could  sufficiently  weaken  the  whole  enterprise  because  the                                                               
parent company  would have  to seek a  stay under  the bankruptcy                                                               
laws and this  in turn could potentially result in  a stay of its                                                               
subsidiary enterprises.  He went on to say:                                                                                     
     We're really trying to prevent  that sort of situation.                                                                    
     There  was [a]  little  bit of  concern  ... about  the                                                                    
     situation  where  you  might   have  a  retailer  or  a                                                                    
     distributor who is named in  a lawsuit and goes all the                                                                    
     way through  judgment ..., and  ... for that  reason we                                                                    
     also put  in some  language in  this bill  dealing with                                                                    
     appellants collectively.  We  were trying to keep those                                                                    
     people from having to post their own bond.                                                                                 
REPRESENTATIVE  GARA  offered his  understanding  that  a lot  of                                                               
cigarette companies produce other  products as well, for example,                                                               
MR. TEEL  acknowledged that the  parent company of  Philip Morris                                                               
[Incorporated], Altria [Group, Inc.], also owns Kraft [Foods].                                                                  
REPRESENTATIVE  GARA said  that he  wants to  make sure  that the                                                               
legislation  is as  narrow as  possible because  he is  concerned                                                               
about extending  "this protection" to  any case that  involves an                                                               
affiliate  of  a  tobacco  company even  if  it  doesn't  involve                                                               
tobacco   specifically.     If  the   real  concern   is  tobacco                                                               
litigation, he  asked, then why  is this bond rule  applicable to                                                               
non-tobacco litigation  too?   Why not limit  it to  just tobacco                                                               
MR. TEEL replied:                                                                                                               
     Let's  imagine  you  had   something  that  ...  didn't                                                                    
     involve  tobacco  per se,  say  a  big derivative  suit                                                                    
     brought  against  the  parent company,  Altria  [Group,                                                                    
     Inc.],  that  somehow  dealt  with  ...  some  sort  of                                                                    
     corporate action  that had nothing in  particular to do                                                                    
     with the  sale of  cigarettes.  If  that resulted  in a                                                                    
     massive judgment,  ... you'd  still have to  bond that,                                                                    
     and  the  process of  having  to  bond it  could  cause                                                                    
     Altria [Group,  Inc.,] to  have problems  continuing to                                                                    
     make its obligations under the  MSA.  It really doesn't                                                                    
     have much  to do at all  with cigarettes; it has  to do                                                                    
     with  the  financial health  of  the  company, and  any                                                                    
     large  judgment could  weaken the  financial health  of                                                                    
     the company.                                                                                                               
Number 2258                                                                                                                     
REPRESENTATIVE  GARA  asked why  the  amount  of $25  million  is                                                               
proposed.  Why  is that the appropriate amount as  opposed to $60                                                               
million or $80 million?                                                                                                         
MR. TEEL replied:                                                                                                               
     We start  with $25 million.   I will tell you  there is                                                                    
     one state  - Idaho  - that went  with $1  million; they                                                                    
     thought $25 [million]  was outlandish.  The  way it has                                                                    
     worked out  around the country,  it's really kind  of a                                                                    
     question of  what the legislature is  comfortable with,                                                                    
     and I think  the bill that came out of  the Senate side                                                                    
     this  morning ...  [now has  an] amount  [of] ...  $100                                                                    
     million.   And with that,  I think some of  these other                                                                    
     concerns ...  they were okay  with. ... About 10  to 13                                                                    
     ... states  have the $25-million number;  about another                                                                    
     5 or 6  have $50 million; 1 has $75  [million]; about 5                                                                    
     or 6 have $100 million; and 2 have $150 million.                                                                           
REPRESENTATIVE  OGG asked  whether  it would  be  possible for  a                                                               
company  like ExxonMobil  Corporation to  become an  affiliate of                                                               
one  of  the  signatories  to  the MSA  and,  under  the  current                                                               
language in HB 468, thereby "get out of their $5 billion bond."                                                                 
MR.  TEEL  said no,  adding  that  although it  is  theoretically                                                               
possible that any  company could make a corporate  bid on another                                                               
company, as  a practically matter,  there are very  few companies                                                               
in  the  world  that  are  looking  to  enter  into  the  tobacco                                                               
industry,   particularly  given   the   recent  settlements   and                                                               
litigation.  He offered his  understanding that much of the Exxon                                                               
Valdez litigation was taking place  in the federal courts, and HB
468  establishes  a rule  that  it  would  not apply  in  federal                                                               
courts.  He  mentioned that [his firm] had been  advised to limit                                                               
the legislation  proposed for Alaska  to just  tobacco litigation                                                               
specifically because of the Exxon Valdez litigation.                                                                            
REPRESENTATIVE  GRUENBERG  noted  that  AS 45.53,  which  HB  468                                                               
proposes to alter, pertains only to cigarette sales.                                                                            
MR. TEEL pointed out that some  of the other states "have broadly                                                               
applicable caps that they've adopted  to these appeal bonds," and                                                               
so their  legislation applies  to more  than just  the MSA.   The                                                               
legislation before the committee, however, is "MSA-specific."                                                                   
Number 2107                                                                                                                     
JENNIFER   APP,   Alaska   Advocacy  Director,   American   Heart                                                               
Association,  said   that  the  American  Heart   Association  is                                                               
concerned about  HB 468  because it fails  to protect  the public                                                               
health  of all  Alaskans and  is not  needed to  protect the  MSA                                                               
payments  that  Alaska  receives  every year.    She  noted  that                                                               
because  the use  of  cigarettes is  the  number one  preventable                                                               
cause of heart  disease, the American Heart  Association spends a                                                               
lot of  time and energy  ensuring that the appropriate  amount of                                                               
the  MSA  funds actually  gets  spent  on tobacco  education  and                                                               
cessation  programs.   The American  Heart  Association does  not                                                               
support  HB  468.   Notwithstanding  that  the MSA  payments  are                                                               
incredibly  important  to  the American  Heart  Association,  the                                                               
appeal  bond limit  proposed  via  HB 468  is  nothing more  than                                                               
special legislation  for tobacco companies  that wish to  get out                                                               
of the  current appeal bonds  which apply to all  companies doing                                                               
business  in  Alaska.   "This  bill  essentially would  give  the                                                               
tobacco companies  a bit of  a free  ride here, letting  them cap                                                               
the appeal bond limit at $25 million," she added.                                                                               
MS.  APP  said that  appeal  bonds  serve  an important  role  in                                                               
protecting  plaintiffs  that  have legitimately  prevailed  in  a                                                               
lower court.   This mechanism  ensures that defendants  don't use                                                               
repeated  frivolous appeals,  and  also  ensures that  defendants                                                               
don't lose their  assets or hide them during  the appeal process.                                                               
She noted  that Representative Gruenberg  has already  touched on                                                               
the  American Heart  Association's  concern regarding  subsection                                                               
(b)  of  Section  1,  specifically  the  language,  "outside  the                                                               
ordinary course of  business".  She opined that it  would be very                                                               
difficult, perhaps close  to impossible, for a  plaintiff to show                                                               
that  a  company  was dissipating  assets  outside  the  ordinary                                                               
course  of business,  especially  in  complex litigation  against                                                               
large tobacco companies with widely dispersed assets.                                                                           
MS. APP  predicted that if  there ever were  to be a  large class                                                               
action  lawsuit in  Alaska that  prevails  in a  lower court,  it                                                               
could result  in a damage award  in the billions of  dollars, for                                                               
example, in a case in  which cigarette companies are found guilty                                                               
of  marketing  cigarettes under  false  pretenses,  such as  what                                                               
happened with the  so-called "light" cigarettes, or  if a company                                                               
is found to be directing its  marketing toward children.  In such                                                               
a situation, a  tobacco company could get away with  paying a $25                                                               
million bond  on a multi-billion  dollar judgment.  Even  if such                                                               
is not  likely to occur  in Alaska, she  remarked, it does  set a                                                               
dangerous  precedent without  necessarily offering  protection to                                                               
those that are harmed by cigarettes,  which is the goal of having                                                               
an appeal bond.                                                                                                                 
Number 1955                                                                                                                     
MS.  APP  offered  her  belief   that  provisions  ensuring  that                                                               
companies don't go bankrupt are already  in place.  First of all,                                                               
companies can file  a motion with the court to  reduce the amount                                                               
of the  appeal bond, as  occurred in the  aforementioned Illinois                                                               
case.   The defendant  can also  work out  an agreement  with the                                                               
prevailing plaintiffs  to post  a smaller bond.   She  noted that                                                               
the signatory companies are very  big companies; for example, the                                                               
parent company of Philip Morris  Incorporated has total assets of                                                               
$87.5 billion,  net revenues of  $80.4 billion, and  U.S. tobacco                                                               
revenues  of $18.9  billion.    She said  she  finds it  somewhat                                                               
ironic that  the amount of $25  million was chosen for  Alaska as                                                               
an appeal  bond limit,  since that  is also  the amount  of money                                                               
that tobacco  companies spend annually in  Alaska marketing their                                                               
"deadly products."   Tobacco  companies do  have money  to spend,                                                               
she remarked, they just don't want to post it on appeal bonds.                                                                  
MS. APP  opined that by  lowering nonessential  spending, tobacco                                                               
companies could raise  the money to post on  appeal bonds without                                                               
impacting their  MSA payments.   In conclusion, she said  that if                                                               
[the legislature] is truly concerned  about the future of the MSA                                                               
payments,  there are  some alternatives  to the  concept proposed                                                               
via  HB  468  that  the   American  Heart  Association  would  be                                                               
satisfied with, for  example, using language that  sets an appeal                                                               
bond  limit at  no  greater  than the  total  value  of a  losing                                                               
defendant's assets,  or at no  greater than a  losing defendant's                                                               
total  revenues for  the prior  fiscal year.   Such  alternatives                                                               
would be legitimate  ways of ensuring that  tobacco companies are                                                               
not forced  into bankruptcy,  while also  ensuring that  they are                                                               
not  let off  the  hook too  easily.   House  Bill  468 is  being                                                               
proposed  specifically for  future large  class action  lawsuits,                                                               
and $25  million is  very small  in terms of  an appeal  bond for                                                               
such suits.                                                                                                                     
CHAIR McGUIRE noted that the  American Heart Association has also                                                               
provided written testimony.                                                                                                     
REPRESENTATIVE GARA asked  what standards the court  would use to                                                               
lower an appeal bond amount.                                                                                                    
MS. APP  said she  did not  know what  they are  specifically but                                                               
posited that  the courts do  a balancing test between  the amount                                                               
of the judgment and the amount of the bond.                                                                                     
Number 1741                                                                                                                     
REPRESENTATIVE HOLM raised the issue  of perhaps having an appeal                                                               
bond limit of 10 percent.                                                                                                       
MR.  TEEL said  that  such  has been  discussed  in  a number  of                                                               
states, but  has not been  adopted except  in a couple  of states                                                               
and then  only in conjunction  with a  "hard dollar cap"  and for                                                               
all defendants,  not just  to the MSA  signatories.   He surmised                                                               
that the  reason a 10 percent  limit has not been  more favorably                                                               
received  is  because no  one  is  "very enthusiastic  about  the                                                               
inevitable  post-judgment  proceeding  to   figure  out  what  10                                                               
percent of net worth is."                                                                                                       
CHAIR  McGUIRE  noted  that  in  members'  packets  are  handouts                                                               
provided by Covington & Burling  detailing the appeal bond limits                                                               
enacted by different states; for  example, California has a limit                                                               
of the  lesser of 100  percent of  the judgment of  $150 million,                                                               
and  Texas  has a  limit  of  the lesser  of  50  percent of  the                                                               
judgment debtor's  net worth or  $25 million.  She  remarked that                                                               
some states  have opted for having  an appeal bond limit  that is                                                               
only applicable to the punitive damages portion of a judgment.                                                                  
MR.  TEEL surmised  that  those were  states  that enacted  their                                                               
appeal bond limits at the  time of the aforementioned Engle case,                                                             
and so the focus was very  much on the punitive damages aspect of                                                               
that case.  Since that time,  he remarked, a couple of states set                                                               
appeal bond limits applicable to "damages of all kinds."                                                                        
CHAIR McGUIRE asked  how the punitive damages  have compared with                                                               
compensatory damages in these cases.                                                                                            
MR. TEEL said that although there  is no "average" case, in every                                                               
complaint against tobacco  companies that he's seen,  there is an                                                               
assertion of "a  punitive damages claim."  He  mentioned that the                                                               
tobacco industry  probably prevails  in most  individual personal                                                               
injury cases,  though not  all.   And in some  of the  cases that                                                               
have been lost, there have  been punitive damages ranging between                                                               
1,000 times more  than the compensatory damages to  less than the                                                               
compensatory damages.  He added:                                                                                                
     I  think the  world of  "compensatories" has  changed a                                                                    
     little  bit,  though,  in light  of  the  U.S.  Supreme                                                                    
     Court's decision in  2003 in the State  Farm (ph) case,                                                                  
     which  added a  sort of  constitutional overlay  to the                                                                    
     relationship   between    compensatory   and   punitive                                                                    
     damages.   And that has  resulted in, not only  for the                                                                    
     tobacco industry  but for other companies,  cases being                                                                    
     sent  back  to trial  courts  to  have the  "punitives"                                                                    
Number 1498                                                                                                                     
MR. TEEL  remarked that generally,  the truly massive  portion of                                                               
these verdicts  tends to be  punitive damages, adding that  he is                                                               
not aware  of an  individual "smoking and  health case  ... where                                                               
the  ultimately awarded  compensatory  damages  to the  plaintiff                                                               
exceeded  the $25  million  that's the  cap in  this  bill."   In                                                               
response  to a  question, he  relayed  that he  practices law  in                                                               
Washington DC.                                                                                                                  
REPRESENTATIVE  GRUENBERG opined  that  in  addition to  amending                                                               
Rules 204 and 205 of the  Alaska Rules of Appellate Procedure, HB
468 may  also have the effect  of amending Rule 62  of the Alaska                                                               
Rules  of  Civil Procedure.    He  asked  the committee  aide  to                                                               
investigate  that issue  so that  if  necessary, he  can offer  a                                                               
technical amendment to that effect.                                                                                             
REPRESENTATIVE GARA  noted that 25  states do not have  limits on                                                               
appeal bonds.                                                                                                                   
MR. TEEL indicated that some  of those states do have legislation                                                               
pending, adding  that in  a few  states, the  legislature doesn't                                                               
have the  authority to  make such  a change  - instead  the court                                                               
must do it.                                                                                                                     
REPRESENTATIVE GARA  asked whether any states  have simply turned                                                               
down this proposal.                                                                                                             
MR. TEEL  relayed that in  Iowa, although the  legislature passed                                                               
an appeal  bond limit  twice, the legislation  was vetoed  by the                                                               
governor both  times.   He also offered  his belief  that similar                                                               
legislation  didn't  pass  in  New   Mexico  simply  because  the                                                               
legislature ran out of time.                                                                                                    
Number 1225                                                                                                                     
EMILY NENON,  Alaska Advocacy  Director, American  Cancer Society                                                               
(ACS), said  that one of the  things about HB 468  that she takes                                                               
issue with is the proposition that  it is in the best interest of                                                               
Alaska  to protect  the  health  of the  tobacco  industry.   She                                                               
     We  know that  here in  Alaska, tobacco  annually costs                                                                    
     the  state $132  million  in annual  health care  costs                                                                    
     directly  related to  smoking, and  an additional  $129                                                                    
     million  in lost  productivity.   What  we  bring in  -                                                                    
     that's  supposedly in  jeopardy, as  the argument  goes                                                                    
     here -  is between $22  [million] and $27  million from                                                                    
     the [MSA].   And I  will remind  you all that  like ...                                                                    
     the  American Heart  Association,  the American  Cancer                                                                    
     Society  is  active  in lobbying  to  get  ...  tobacco                                                                    
     settlement  monies spent  on tobacco  control programs;                                                                    
     that fits right into  our mission of eliminating cancer                                                                    
     as a major health problem.                                                                                                 
     But  ultimately,  the  [MSA]   was  about  the  tobacco                                                                    
     industry repaying  the states  for the damage  [it has]                                                                    
     inflicted,  not  about  being   a  windfall  for  state                                                                    
     budgets.   And so around  the country, the  position of                                                                    
     the [ACS]  is, and I'm  reading this right off  the web                                                                    
     site, "We  believe tobacco companies should  be held to                                                                    
     the same  standard as other  industries and  should not                                                                    
     receive  special protection  from state  legislatures."                                                                    
     That is  the basis  that I'm coming  from; I  have been                                                                    
     looking  at this  [and] a  lot of  the other  arguments                                                                    
     have been brought up, but  that's one that I think that                                                                    
     we're  really  missing  and  that   I  would  like  the                                                                    
     committee to  take seriously  in consideration  of this                                                                    
CHAIR  McGUIRE asked  what would  the  ACS's position  be if  the                                                               
legislation before the  committee set appeal bond  limits for all                                                               
types of litigation, not just tobacco litigation.                                                                               
MS. NENON replied:                                                                                                              
     I  have a  personal argument  about that,  and I  would                                                                    
     have to  ... do  some more  checking with  our national                                                                    
     government relations  department to  find out  what the                                                                    
     [ACS's] position  is on that,  [but] the  research that                                                                    
     I've done  shows that the  court system is  designed to                                                                    
     be  able to  handle  setting [appeal]  bonds.   In  the                                                                    
     Illinois  case  last summer,  when  the  judge set  the                                                                    
     [appeal]  bond  level at  $12  billion,  the court  did                                                                    
     reduce that  ... bond  amount ...  down to  $6 billion,                                                                    
     and I will point  out that Philip Morris [Incorporated]                                                                    
     was able to post a $6  billion bond.  So my thinking is                                                                    
     that the courts have been  able to handle this in other                                                                    
     cases, ... [and]  the courts are uniquely set  up to be                                                                    
     able to handle these kinds of issues.                                                                                      
Number 1042                                                                                                                     
REPRESENTATIVE GRUENBERG remarked that  the statute pertaining to                                                               
the  MSA   stems  from  one-of-a-kind  litigation,   and  that  a                                                               
supersedeas bond  is generally  the amount  of the  judgment plus                                                               
interest.   Such  an amount,  he opined,  could "easily  bust the                                                               
bank," particularly given that bankruptcy  is sometimes used as a                                                               
form  of  corporate strategy  and  that  "we've already  sold  80                                                               
percent of  the tobacco settlement."   "So it's not as  simple as                                                               
all that," he concluded.                                                                                                        
CHAIR McGUIRE asked  Ms. Nenon to provide the  committee with the                                                               
ACS's position on  an alternative:  making the  appeal bond limit                                                               
apply  to all  litigation.   Chair McGuire  said she  agrees with                                                               
Representative  Gruenberg  that  the [MSA]  presents  an  unusual                                                               
REPRESENTATIVE HOLM asked what it  costs to purchase a $1 billion                                                               
MR. TEEL relayed  that a $10 million bond could  be purchased for                                                               
perhaps 1 to 2 percent of  that amount, whereas a $1 billion bond                                                               
could perhaps be purchased for  an amount ranging between tens of                                                               
millions  of dollars  and  $100 million,  depending  on "who  you                                                               
are."   He  noted that  companies that  have "a  higher perceived                                                               
risk  in the  litigation market  place" have  a hard  time buying                                                               
bonds, adding  that the tobacco  industry has  a little bit  of a                                                               
history in  attempting to  buy such bonds  and has  typically not                                                               
been able  to buy them.   Instead, the tobacco companies  that he                                                               
represents have had to put money  into a bank account in order to                                                               
get a  letter of credit from  the bank; that letter  of credit is                                                               
then given  to the  surety company, which  then issues  the bond.                                                               
"If you can buy them, they're a relatively small percentage of                                                                  
the judgment, but it's not clear everybody can buy them," he                                                                    
Number 0813                                                                                                                     
REPRESENTATIVE GARA asked Ms. Nenon for a copy of the statement                                                                 
she'd read from earlier.                                                                                                        
MS. NENON agreed to provide a copy of that to him, adding that                                                                  
the language on the ACS's web site is a lot stronger than her                                                                   
spoken testimony.                                                                                                               
REPRESENTATIVE GARA asked of Mr. Teel:                                                                                          
     If we're trying  to protect the assets  of a particular                                                                    
     company and  we're going  to do it  with a  $25 million                                                                    
     limit or a  $100 million limit, whatever  the limit is,                                                                    
     why do  we also  have this provision  in the  bill that                                                                    
     says collectively  it can't exceed $25  million ... [or                                                                    
     whatever   the  limit   is],  collectively   among  all                                                                    
     defendants put together?                                                                                                   
MR. TEEL replied:                                                                                                               
     What we  were worried about there  was small defendants                                                                    
     being  sued with  large defendants.    In these  cases,                                                                    
     sometimes   ...  you   get   the   retailers  and   the                                                                    
     distributors who  get named in  the lawsuit,  and often                                                                    
     they  are   just  there   for  purposes   of  defeating                                                                    
     diversity and  keeping a case  in state court.  ... And                                                                    
     ... sometimes  they're carried all  the way  through to                                                                    
     the judgment.  We just thought  it was a little much to                                                                    
     ask some of those ...  smaller [businesses] ... in this                                                                    
     litigation, who are not really  the target, to have to,                                                                    
     themselves, post the  larger bond.  And so  this was an                                                                    
     effort to kind  of sweep everybody in on  the one bond.                                                                    
     Most  states  that  have passed  this  have  kept  that                                                                    
     "collectively" language, [but] not every state has.                                                                        
CHAIR McGUIRE indicated that HB 468 would be held over.                                                                         

Document Name Date/Time Subjects